Tags: China | Lew | Emerging | Fed

China Rebuts Lew as Emerging Markets Keep Pressure on Fed

Sunday, 23 February 2014 03:14 PM

China led developing markets in hitting back at the U.S. Friday as South Africa kept up pressure on the Federal Reserve to consider the spillover effects of tapering its bond-buying program.

A day after Treasury Secretary Jacob J. Lew questioned the pace of China’s economic opening, Chinese Finance Minister Lou Jiwei said the U.S. economy had been buoyed by monetary policy rather than structural changes. South Africa’s Deputy Finance Minister Nhlanhla Nene called on the Fed to weigh the impact on developing nations as it pares stimulus.

As Group of 20 finance ministers and central bank governors began their two-day meeting in Sydney Friday trying to find common ground to support economic growth, officials are less unified on monetary policy. While the U.S. and fellow industrial countries have put the onus on their emerging counterparts to get their houses in order to withstand volatility, developing-market officials want policy calibration.

“The tension is likely to continue,” said Tomo Kinoshita, chief economist at Nomura Holdings Inc. in Tokyo. “China is on the side of the emerging economies rather than on the side of the advanced economies.”

Nations including South Africa, Brazil and India have seen their currencies rattled as the Fed begins to dial-back unprecedented stimulus measures. The MSCI Emerging Markets Index has lost 4.3 percent so far this year, its worst annual start since 2010.

Lew Vs Lou

Lew, speaking in Sydney on Friday, said while China wants “to move in the right direction” on opening its economy, “I have yet to see the signs that they are moving with the speed that we would want.”

Turning the tables, China’s Lou said while developed countries now seem very positive about their growth prospects, “that may not be totally true.”

“Take the U.S. for example: Its recovery is being helped by monetary policy and not much by structural adjustment,” he told Bloomberg News. “They have always been saying that China should boost its consumption ratio and the U.S. should boost its investment ratio, but that structural change is not happening in the United States.”

The Fed has kept rates low to spur the economy as a budget deficit restricted President Barack Obama’s administration’s ability to stimulate demand. The unprecedented monetary stimulus steered investors toward emerging markets in search of yield, a process that is reversing along with the Fed’s taper.

G-20 Backing

The G-20 is backing the normalization of monetary policy in advanced economies in line with stronger growth, according to a draft communique seen by Bloomberg News. The final statement was scheduled to be released Saturday.

South Africa wants agreement within the G-20 on the coordination of economic policies as it pushes for stronger acknowledgment of the impact of the Fed’s moves on smaller nations, Deputy Finance Minister Nene said in an interview Friday.

The Fed should seek a consensus among global counterparts on “what is the optimum level of withdrawal that the world economy can manage,” India’s Economic Affairs Secretary Arvind Mayaram said in Sydney Friday. The nation’s central bank Governor Raghuram Rajan last month warned of a breakdown in global coordination due to the tapering.

Growth Reversal

Strengthening in developed economies and a slowdown in growth in China, India, Brazil and elsewhere reverses the trend that had shaped global growth since 2008. Carlos Cozendey, Brazil’s deputy finance minister, said yesterday in Sydney that the Fed had helped reduce emerging markets’ concern over tapering, saying it would be mindful of spillovers.

Emerging markets may not forget easily should their concerns go unheeded. After learning from the Asian financial crisis of the late 1990s to accumulate reserves, allow flexible exchange rates and not have too much foreign-currency debt, this episode is teaching them another lesson, said Eswar Prasad, a former International Monetary Fund economist who now teaches economics at Cornell University in Ithaca, New York.

“The next time if capital does start flowing in, every one of these economies is going to use the opportunity to accumulate more reserves” and prevent currency appreciation, Prasad said. “We will be seeing some complaints coming from the advanced economies when this starts happening.”

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China led developing markets in hitting back at the U.S. Friday as South Africa kept up pressure on the Federal Reserve to consider the spillover effects of tapering its bond-buying program.
Sunday, 23 February 2014 03:14 PM
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